Continuing care retirement community contracts explained: Type A vs. type B vs. type C

Key takeaways:

The contract type you choose at a continuing care retirement community is a trade-off between a one-time upfront fee and monthly fees versus the cost of services you will need over your lifetime.
A lower entrance fee does not mean lower lifetime costs.
No one can predict future health with certainty, so the decision should be based on a realistic assessment of your health, family history, financial reserves and comfort with uncertainty.

When people evaluate a continuing care retirement community, or CCRC, they must determine how much care they want today — and in the future.

Levels of care are broken down into contracts that determine how much of your future care is prepaid, how your costs change if you need skilled nursing, and who absorbs the financial risk if your health declines.

It's a decision you should make before joining a CCRC, said Bruce Rosenblatt, an eldercare advocate who owns Senior Housing Solutions in Naples, Florida.

"I share with my clients that it's always better to be five years too early rather than five minutes too late," he said.

"Understanding the differences is critical before signing a contract," he added. "You don't want to be 'surprised' or disappointed after you have moved in."

Most continuing care communities offer three contract types, commonly called type A, type B and type C. Some also offer a rental option. Each one structures costs differently, and the right choice depends on your health, your finances and how much uncertainty you are willing to accept.

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Type A: The life care contract

The type A contract has the highest entrance fee and the most predictable long-term costs. Under this arrangement, you prepay for future care. If you eventually need assisted living, memory care or skilled nursing, those services are generally provided at little or significantly reduced additional cost compared with market rates, depending on the contract.

Monthly fees typically increase annually to account for inflation, but they do not spike when your care needs change.

Type A contracts are the most comprehensive and predictable option, said Rosenblatt.

Whom it suits: A type A contract tends to appeal to people who want cost certainty. It is also a natural fit for residents with a family history of conditions that may require extended care, such as dementia, and for those who want to preserve their remaining assets for a spouse or heirs rather than spending down on escalating care fees.

Whom it doesn't suit: Retirees who lack financial resources may not be able to afford the care, said Rosenblatt. It may not be cost-effective if higher levels of care are never needed, he added.

Type B: The modified contract

The type B contract has a moderate entrance fee, lower than type A but higher than type C. It includes a defined amount of future care, often measured in days or months of assisted living or skilled nursing, at a reduced rate or at no additional cost. Once you exceed that allotment, you pay for additional care out of pocket, typically at a discounted rate but sometimes at full market pricing.

Whom it suits: Type B contracts appeal to people who want some protection against rising care costs but are willing to accept more risk in exchange for a lower entrance fee. It can be a reasonable middle ground for residents who are in good health and have enough savings to absorb higher costs if their care needs eventually exceed the contract's coverage. It's a good option for retirees with long-term health insurance that pays for care, said Rosenblatt.

Whom it doesn't suit: Retirees who need predictability about future costs, said Rosenblatt. Healthcare costs can increase, and there is no guarantee of price of care when it's needed.

Type C: The fee-for-service contract

The type C contract has the lowest entrance fee. It covers your independent living arrangement and basic amenities, but it does not prepay for any future care. If you need assisted living, memory care or skilled nursing, you pay for those services at the community's prevailing market rates, which can be substantially higher than your independent living fees.

Under this contract, you bear the full financial risk. If your health declines and you need years of skilled nursing, the cost is yours to cover. The CCRC guarantees you access to higher levels of care within the community, but not at a discounted price.

Whom it suits: Type C contracts appeal to residents who are in excellent health, have strong financial reserves and want to minimize their upfront commitment. It can also make sense for people who believe they are unlikely to need extensive care and prefer to keep more of their assets liquid or invested rather than tied up in a large entrance fee.

Whom it doesn't suit: Couples are at risk of simultaneously paying for an independent living apartment for one spouse and assisted living, memory care and skilled nursing charges out of pocket for another, said Rosenblatt. There's less financial predictability, he added.

The rental option

Some continuing care communities offer a fourth arrangement, sometimes called a type D or rental contract. This model requires no entrance fee, or a very small one, and charges a monthly fee that covers housing and basic amenities. Access to higher levels of care is available, but care services are billed at market rates.

Rental contracts are less common and typically cost more on a monthly basis because there is no large upfront payment subsidizing the fees. They appeal to people who do not want to commit a large sum or who are uncertain about whether a continuing care retirement community is the right long-term fit.

How costs can differ over time

The gap between contract types may seem modest at the start, but it can widen dramatically over the course of a long retirement. Consider three hypothetical residents who move into the same community at the same time, each choosing a different contract.

Resident A (type A): Pays the highest entrance fee and a moderate monthly charge. For the first 10 years, they live independently and their costs are the highest of the three. In year 11, they move to assisted living. Their monthly fee increases slightly for inflation but does not jump. In year 15, they move to skilled nursing. Their monthly fee still does not change materially. Over 20 years, Resident A's total costs are high upfront but flat and predictable throughout.

Resident B (type B): Pays a moderate entrance fee and a lower monthly charge. For the first 10 years, their total costs are lower than Resident A's. In year 11, they move to assisted living. Their contract covers the first year at a reduced rate. After the included care period is exhausted, residents typically pay discounted or market-based rates, depending on the terms of the contract.

In year 15, they move to skilled nursing and pay the full market rate. Over 20 years, Resident B's total costs may approach or exceed Resident A's, depending on how long they need higher-level care.

Resident C (type C): Pays the lowest entrance fee and the lowest monthly charge during independent living. For the first 10 years, their costs are the lowest of the three. In year 11, they move to assisted living and begin paying market rates, which are significantly higher. In year 15, they move to skilled nursing at an even higher rate. Over 20 years, Resident C's total costs may be the highest of all three, despite starting with the smallest commitment.

The takeaway is straightforward: A lower entrance fee does not mean lower lifetime costs. It means lower costs now and potentially higher costs later.

Before choosing a contract, understand whether and to what extent the continuing care community will refund the entrance fee — if you move or when you die — charged to residents when they first enter. The communities differ in their policies. Some will refund 90% of the entrance fee, while others will refund much less. Still others have a non-refundable fee. The amount of entrance fee that is refundable can factor into the overall costs of the CCRC.

What if you never need higher care?

This is the question that makes the type A contract feel like a gamble. If you live independently for your entire stay and never use assisted living or skilled nursing, you will have paid a large entrance fee for care you never received.

In that scenario, a type C contract would have been the less expensive choice. You would have paid less upfront and never triggered the higher care fees.

But no one can predict their future health with certainty. The type A contract is, in effect, insurance. Like all insurance, its value depends on whether you end up needing it. The difference is that the consequences of being uninsured in a CCRC are not abstract. They are potentially tens of thousands of dollars a year in care costs that must be paid out of your remaining savings.

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